1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
China continues to be one of the largest recipients of global FDI due to a relatively high economic growth rate and an expanding consumer base that demands diverse, high-quality products. FDI has historically played an essential role in China’s economic development. However, due to recent stagnant FDI growth and gaps in China’s domestic technology and labor capabilities, Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and non-discriminatory, “national treatment” for foreign enterprises through general improvements to the business environment. They also have made efforts to strengthen China’s regulatory framework to enhance broader market-based competition.
In 2019, China issued an updated nationwide “negative list” that made some modest openings to foreign investment, most notably in the financial sector, and promised future improvements to the investment climate through the implementation of China’s new FIL. MOFCOM reported that FDI flows to China grew by 5.8 percent year-on-year in 2019, reaching USD137 billion. In 2019, U.S. businesses expressed concern over China’s weak protection and enforcement of intellectual property rights (IPR); corruption; discriminatory and non-transparent anti-monopoly enforcement that forces foreign companies to license technology at below-market prices; excessive cyber security and personal data-related requirements; increased emphasis on the role of CCP cells in foreign enterprises, and an unreliable legal system lacking in both transparency and the rule of law.
China seeks to support inbound FDI through the “Invest in China” website, where MOFCOM publishes laws, statistics, and other relevant information about investing in China. Further, each province has a provincial-level investment promotion agency that operates under the guidance of local-level commerce departments. See:
Limits on Foreign Control and Right to Private Ownership and Establishment
Entry into the Chinese market is regulated by the country’s “negative lists,” which identify the sectors in which foreign investment is restricted or prohibited, and a catalogue for encouraged foreign investment, which identifies the sectors the government encourages foreign investment to be allocated to.
- The Special Administrative Measures for Foreign Investment Access (̈the “Nationwide Negative List”);
- The Special Administrative Measures for Foreign Investment Access to Pilot Free Trade Zones (the “FTZ Negative List”) used in China’s 18 FTZs
- The Industry Catalogue for Encouraged Foreign Investment (also known as the “FIC”). The central government has used the FIC to encourage FDI inflows to key sectors – in particular semiconductors and other high-tech industries that would help China achieve MIC 2025 objectives. The FIC is subdivided into a cross-sector nationwide catalogue and a separate catalogue for western and central regions, China’s least developed regions.
In addition to the above lists, MOFCOM and NDRC also release the annual to guide investments. This negative list – unlike the nationwide negative list that applies only to foreign investors – defines prohibitions and restrictions for all investors, foreign and domestic. Launched in 2016, this negative list attempted to unify guidance on allowable investments previously found in piecemeal laws and regulations. This list also highlights what economic sectors are only open to state-owned investors.
In restricted industries, foreign investors face equity caps or joint venture requirements to ensure control is maintained by a Chinese national and enterprise. These requirements are often used to compel foreign investors to transfer technology in order to participate in China’s market. Foreign companies have reported these dictates and decisions are often made behind closed doors and are thus difficult to attribute as official Chinese government policy. Foreign investors report fearing government retaliation if they publicly raise instances of technology coercion.
Below are a few examples of industries where these sorts of investment restrictions apply:
- Preschool, general high school, and higher education institutes require a Chinese partner.
- Establishment of medical institutions also require a Chinese JV partner.
Examples of foreign investment sectors requiring Chinese control include:
- Selective breeding and seed production for new varieties of wheat and corn.
- Basic telecommunication services.
- Radio and television listenership and viewership market research.
Examples of foreign investment equity caps include:
- 50 percent in automobile manufacturing (except special and new energy vehicles);
- 50 percent in value-added telecom services (except e-commerce domestic multiparty communications, storage and forwarding, call center services);
- 50 percent in manufacturing of commercial and passenger vehicles.
The 2019 editions of the nationwide and FTZ negative lists and the FIC for foreign investment came into effect July 30, 2019. The central government updated the Market Access Negative List in October 2019. The 2019 foreign investment negative lists made minor modifications to some industries, reducing the number of restrictions and prohibitions from 48 to 40 in the nationwide negative list, and from 45 to 37 in China’s pilot FTZs. Notable changes included openings in the oil and gas sector, telecommunications, and shipping of marine products. On July 2, 2019, Premier Li Keqiang announced new openings in the financial sector, including lifting foreign equity caps for futures by January 2020, fund management by April, and securities by December. While U.S. businesses welcomed market openings, many foreign investors remained underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization. Foreign investors noted these announced measures occurred mainly in industries that domestic Chinese companies already dominate.
Other Investment Policy Reviews
China is not a member of the Organization for Economic Co-Operation and Development (OECD), but the OECD Council established a country program of dialogue and co-operation with China in October 1995. The OECD completed its most recent investment policy review for China in 2008 and published an update in 2013.
China’s 2001 accession to the World Trade Organization (WTO) boosted China’s economic growth and advanced its legal and governmental reforms. The WTO completed its most recent investment trade review for China in 2018, highlighting that China remains a major destination for FDI inflows, especially in real estate, leasing and business services, and wholesale and retail trade.
In 2019, China climbed more than 40 spots in the World Bank’s Ease of Doing Business Survey to 31st place out of 190 economies. This was partly due to regulatory reforms that helped streamline some business processes, including improvements to addressing delays in construction permits and resolving insolvency. This ranking does not account for major challenges U.S. businesses face in China like IPR violations and forced technology transfer. Moreover, China’s ranking is based on data limited only to the business environments in Beijing and Shanghai.
Created in 2018, the State Administration for Market Regulation (SAMR) is now responsible for business registration processes. The State Council established a new website in English, which is more user-friendly than SAMR’s website, to assist foreign investors looking to do business in China. In December 2019, China also launched a Chinese-language nationwide government service platform on the State Council’s official website. The platform connected 40 central government agencies with 31 provincial governments, providing information on licensing and project approvals by specific agencies. The central government published the website under its “improving the business climate” reform agenda, claiming that the website consolidates information and offers cross-regional government online services.
Foreign companies still complain about continued challenges when setting up a business relative to their Chinese competitors. Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices in China. Investors should review their options carefully with an experienced advisor before choosing a corporate entity or investment vehicle.
Since 2001, China has pursued a “going-out” investment policy. At first, the Chinese government mainly encouraged SOEs to secure natural resources and facilitate market access for Chinese exports. In recent years, China’s overseas investments have diversified with both state and private enterprises investing in nearly all industries and economic sectors. While China remains a major global investor, total outbound direct investment (ODI) flows fell 8.2 percent year-on-year in 2019 to USD110.6 billion, according to MOFCOM data.
In order to suppress significant capital outflow pressure, the Chinese government created “encouraged,” “restricted,” and “prohibited” outbound investment categories in 2016 to guide Chinese investors, especially in Europe and the United States. While the guidelines restricted Chinese outbound investment in sectors like property, hotels, cinemas, entertainment, and sports teams, they encouraged outbound investment in sectors that supported Chinese industrial policy by acquiring advanced manufacturing and high-tech assets. Chinese firms involved in MIC 2025 targeted sectors often receive preferential government financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment. The guidance also encourages investments that promote China’s One Belt One Road (OBOR) initiative, which seeks to create connectivity and cooperation agreements between China and dozens of countries via infrastructure investment, construction projects, real estate, etc.
7. State-Owned Enterprises
China has approximately 150,000 wholly-owned SOEs, of which 50,000 are owned by the central government, and the remainder by local or provincial governments. SOEs, both central and local, account for 30 to 40 percent of total gross domestic product (GDP) and about 20 percent of China’s total employment. Non-financial SOE assets totaled roughly USD30 trillion. SOEs can be found in all sectors of the economy, from tourism to heavy industries. In addition to wholly-owned enterprises, state funds are spread throughout the economy, such that the state may also be the majority or largest shareholder in a nominally private enterprise. China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.” SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals. SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt. A comprehensive, published list of all Chinese SOEs does not exist.
PRC officials have indicated China intends to utilize OECD guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence. Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers who have produced mixed results. However, analysts believe minor reforms will be ineffective if SOE administration and government policy remain intertwined, and Chinese officials have made minimal progress in fundamentally changing the regulation and business conduct of SOEs. SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy. Among central SOEs managed by the State-owned Assets Supervision and Administration Commission (SASAC), senior management positions are mainly filled by senior CCP members who report directly to the CCP, and double as the company’s party secretary. SOE executives outrank regulators in the CCP rank structure, which minimizes the effectiveness of regulators in implementing reforms. The lack of management independence and the controlling ownership interest of the state make SOEs de facto arms of the government, subject to government direction and interference. SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail. U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.
Since 2013, the PRC government has periodically announced reforms to SOEs that included selling SOE shares to outside investors or a mixed ownership model, in which private companies invest in SOEs and outside managers are hired. The government has tried these approaches to improve SOE management structures, emphasize the use of financial benchmarks, and gradually infuse private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance. In practice, however, reforms have been gradual, as the PRC government has struggled to implement its SOE reform vision and often preferred to utilize a SOE consolidation approach. Recently, Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the state as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
*China’s National Bureau of Statistics (converted at 6.8 RMB/USD estimate)
**China’s 2019 Yearbook (Annual Economic Data from China’s Economic Ministries: MOFCOM, NBS, and Ministry of Finance)
|Direct Investment from/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||$2,814,067||100%||Total Outward||$1,982,270||100%|
|China, PR: Hong Kong||$1,378,383||48.96%||China, PR: Hong Kong||$958,904||48.37%|
|British Virgin Islands||$302,553||10.75%||Cayman Islands||$237,262||11.96%|
|Japan||$166,817||6.13%||British Virgin Islands||$119,658||6.03%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Source: IMF Coordinated Direct Investment Survey (CDIS)
|Portfolio Investment Assets|
|Top Five Partners (Millions, US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||$560,250||100%||All Countries||$303,4000||100%||All Countries||$256,849||100%|
|China, PR: Hong Kong||$179,672||32.0%||China, PR: Hong Kong||$121,883||40.1%||China, PR: Hong Kong||$57,789||22.5%|
|Cayman Islands||$47,917||8.5%||Cayman Islands||$28,323||9.3%||British Virgin Island||$38,230||14.8%|
|British Virgin Island||$40,270||7.1%||Luxembourg||$8,786||2.8%||Cayman Islands||$19,594||7.6%|